Tag Archives: SBA

Sandoval’s Session: GCSB Menu — To Serve Man?

To Serve ManNevada’s economic plan — hold another conference? There’s nothing like a lovely conference to get the juices flowing in regard to economic development.  Not that there’s anything essentially unproductive about getting small business leaders in the same room with government officials and inspiring speakers…but.   The Governor’s office and the Chamber are teaming up to present panels on “Access to Capital, Educating Tomorrow’s Workforce and Healthcare: Myths and Facts.” [NV2013]

The “grand sponsor” of the event is NV Energy.  Other sponsors include Heritage Bank, AT&T, Advantage Capital Partners, and IQ Technology Solutions.   [NV2013]

Skeptics may wonder what AT&T, whose petition to the FCC in 2013 is straight out the of ALEC model plans book, [HuffPo] wants to say to small business owners and managers in Nevada, other than to promote the idea that they should continue to utilize their old copper wires to offer U-Verse services over their system without all basic obligations and regulations on the state and federal level.  We might wonder about AT&T’s grand plans for broadband access for small businesses when these observations come to light:

“In 2009, AT&T’s started the federal ball rolling with comments outlining that the states should not have jurisdiction over broadband and it should be the exclusive purview of the FCC — read federal law. Moreover, regulations should be removed on virtually all aspects of their business that would be applied by either the FCC or the commission — including removing service quality requirements.”  [HuffPo]  (Emphasis added)

NV Energy is the self-same corporation purchased by Warren Buffet’s MidAmerican Energy Corp. for $5.6 billion this past May. [USAT] This would also be the self-same energy corporation looking for a rate increase:

“NV Energy’s residential power and natural gas customers would see rate increases starting in January under the utility’s three-year general rate case filed Monday with the state Public Utilities Commission.

The increases, which include a profit and must be approved by regulators, would add $1.48 per month to the average single-family residence power bill across Northern Nevada and $3.96 to the typical monthly bill for natural gas customers in Reno-Sparks. Commercial customers in Northern Nevada would see an average 2.81 percent decline in electricity rates under the filing.”  [RGJ] (June 4, 2013)

Thus far we have one corporate sponsor that wants to “transition” its communications services without making any real technological progress, and desires to do so without state “interference” or those “burdensome regulations” on quality of service; and, another that has a rate increase proposal before the PUC.  What could possibly get skewed?

Heritage Bank is pleased to tell one and all that it is the Number One processor of SBA 504 loans in northern Nevada:

Heritage Bank of Nevada has been named the #1 SBA lender for 2012 in Northern Nevada as the largest processor of SBA 504 loans.  In FY2012, Heritage Bank partnered with Nevada State Development Corp. to provide funding on 15 projects totaling $22,014,750. Heritage Bank’s portion of the loans totaled $9,812,788 and the SBA’s 504 loans totaled $8,179,000. [Heritage Bank]

SBA 504 loans are made to business owners for purchasing or refinancing commercial real estate.  As of January 2013, Heritage Bank had lent out funding for 15 small business projects totaling $22 million, with 90% of the funds for commercial real estate loans.  [RGJ]

A firm is eligible for a SBA 504 loan if it has a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years. [SBA]  It’s safe to say that most of Nevada’s small businesses would be eligible for these loans.

Grinding down a bit on the SBA 504’s:  A Certified Development Company (CDC) is a nonprofit corporation set up to contribute to the economic development of its community. CDCs are located nationwide and operate primarily in their state of incorporation (Area of Operation). CDCs work with SBA and private-sector lenders to provide financing to small businesses through the CDC/504 Loan Program, which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. [SBA-CDC]

The typical SBA 504 CDC has the following components:

  • A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost;
  • A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost;
  • A contribution from the borrower of at least 10 percent equity.

So, a “project” would get its real estate, or equipment, loan in blocks —  50% from the lender/bank ; 40% from a CDC; and, a contribution of 10% equity.

What we’re not seeing in the Heritage Bank numbers are  7 a loans, those made to entrepreneurs and business persons who are launching start ups, or expanding businesses.  The 7a, or general business loans are the kind we’d most often associate with the start up, financing, or expansion of new businesses.

Between October 2012 and May 2013, the major players in the 7(a) program were Wells Fargo, Meadows Bank, Seacoast Commerce, Republic Bank, Hanmi Bank, U.S. Bank NA, Pacific Enterprise Bank, and further down the list, Heritage Bank with five 7 (a) loans out for a bank total of $1,170,000.  [SBA lenders]

If Heritage is seeking to inform more small business owners and managers of the availability of SBA 7 (a) loans that would be an excellent panel. However, if financing in Nevada is getting increasingly sucked into the “income generating property” business there are some questions which need to be raised.  How much money is getting resourced to real estate development firms seeking to buy up distressed property and make conversions to rental units?  Would a subsidiary of one of the Really Big Banks qualify as a business eligible for 504 loans?

Advantage Capital Partners is another of the highlighted sponsors of the Governor’s economic gathering.   The firm describes itself:

“Since 1992, we have raised more than $1.6 billion in institutional capital, often involving innovative structured financing solutions. Our capital has been provided by a large number of the nation’s leading insurance companies and commercial banks.”  [ACP]

Excuse me, but after the Debacle of 2007-2008, when I see phrases like “innovative structured financing solutions” my immediate reaction is to curl into a fiscal fetal position.  Why?  The very definition of structured finance is enough to bring on tremors:

A service that generally involves highly complex financial transactions offered by many large financial institutions for companies with very unique financing needs. These financing needs usually don’t match conventional financial products such as a loan. [Investopedia]

And what might be included in those “highly complex financial transactions?”   Some of our old and not-so-dear friends like: Collateralized Bond Obligations, Collateralized Debt Obligations, syndicated loans, and those wonderful Synthetic CDO’s etc.  I think we’ve seen this movie before, and the ending was — if not pleasant — at least memorable.

And, who’s paddling in these waters? “Our capital has been provided by a large number of the nation’s leading insurance companies and commercial banks.”  — What could possibly go wrong?

To Serve Man

On August 28, 2013 the Governor and the attendees of the GCSB conference will be under the Grand Sierra roof with (1) a communications firm that wants ever so much to be rid of pesky government regulations concerning customer service, (2) bankers who are delighted to offer SBA backed loans for real estate transactions, (3) a “high” finance firm still promoting the joys and profitability of synthetic CDO’s and other financial exotics that contributed to the Great Mortgage Meltdown, and an Energy corporation looking to increase its rates …

It could indeed be a menu To Serve Man.

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Small Business Lending: The Variable Factor

Small Business SignAccording to the U.S. Chamber of Commerce all Nevadans should be mightily pleased that small business lending is a nice feature of the Nevada economy.  If we look no further than superficial statements, the prospects do, indeed, look rosy in southern Nevada as of last March:

“Contrary to public perception, banks want to lend,” said Bruce Ford, senior vice president of City National Bank. “When they say banks aren’t lending, that’s not accurate.”  Still, loans still have not reached pre-recession levels, said Bill Uffelman, president and CEO of the Nevada Bankers Association.  The SBA, which plays a role in most business loans, last year issued $175 million in loans statewide. That’s up from $167 million in 2011 and $103 million in 2010.  But it falls far short of the $277 million the SBA lent in Nevada in 2007.” [VegasInc]

Here’s why the level of small business lending isn’t a particularly good index of what’s happening in the overall economy.  When attempting to present the case that Factor A is a crucial element in Outcome B, it’s preferable not to have too many variables.

There’s a hint concerning the Variable Problem in the statement from the VP of City National Bank — they have money to lend, but they aren’t making loans.  Therefore, we can’t merely assume that the banks “aren’t lending” or are somehow being recalcitrant about opening the vaults to small business owners.  There’s a second crucial factor in play: Banks can’t make loans to people who don’t want them.

What’s Out There?

The most common small business loan is the SBA backed 7 (a) program.  These loans, made by local banks, can be used for long term working capital applied towards operational expenses, accounts payable, purchasing inventory.  They can also be used for short term capital needs like seasonal financing, contract performance.  Then there’s the money available for equipment, land, real estate, new buildings, and for the establishment of new enterprises. [SBA]

Here’s the point at which the wickets get sticky — what do we make of the figures on SBA 7 (a) lending program?

FY 2007   99,606 loans approved totaling $14.3 billion.

FY  2008  69,434 loans approved totaling $12.7 billion.

FY 2009  41,289  loans approved totaling $9.2 billion.

FY 2010  47,002  loans approved totaling $12.4 billion.

FY  2011   53,706 loans approved totaling $19.6 billion.

FY 2012    44,377 loans approved totaling $15.2 billion.

If we look at the amount of approved borrowing under the SBA 7 (a) program then have we seen an increase in Business Lending?  Or, if we look at the number of loans approved do we see a decline in Business Lending between FY 2007 and FY 2012?  Was there more Business Lending in FY 2011 when the total amount approved was the highest between 2007 and 2012, or does the reduction in the number of loans between 2007 and 2011 from 99,606 to 53,706 mean there was less Business Lending?

The SBA can analyze theses numbers and offer generalizations, but still not answer the question of what constitutes more, or less, Business Lending:

“The SBA attributed the decreased number and amount of 7(a) loans approved in FY2008 and FY2009 to a reduction in the demand for small business loans resulting from the economic uncertainty of the recession (December 2007 – June 2009) and to tightened loan standards imposed by lenders concerned about the possibility of higher loan default rates resulting from the economic slowdown. The SBA attributed the increased number of loans approved in FY2010 and FY2011 to legislation that provided funding to temporarily reduce the 7(a) program’s loan fees and temporarily increase the 7(a) program’s loan guaranty percentage to 90% for all standard 7(a) loans from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000.”  [SBA pdf]

Just to make matters a bit more complicated not all approved loans are actually disbursed. The number of loans approved can range from 10% to 20% higher than the number of loans for which funds are disbursed.  Some owners decide not to finalize the loans, sometimes there is a change of ownership and the loan is dropped. [SBS pdf]

If this isn’t complicated enough, we can add another variable to the mixture — politics.  The Obama Administration has argued for additional lending under the SBA 7 (a) and 504 loan programs, while critics of the Administration have asserted that tax reductions, easing of regulations on the financial sector, and a reduction in overall federal spending are the best ways to improve small business growth.

In short, we can see what moves the needle in terms of SBA lending programs, but it is far more difficult to determine if this means that there is more or less Business Lending.  It’s even more difficult to make qualitative statements that because there is “more” business lending in a particular state or region if this means there is more economic growth.

A 2008 Urban Institute study (pdf) found that 34% of SBA loans were purposed for purchasing or installing new equipment; 23% were allocated to loans for finance working capital; 21% were used for acquiring a new business; and, 6% of the loans were to support new hiring.

Micros and Macros

Since this has already become a snarl of complications, let’s add another one: Macro and Micro Lending.  By SBA standards a macro loan is over $100,000 to $1 million, and a micro loan is loan under $100,000.  Here again, the picture is muddy because as of August 2012:

“Larger loans grew while smaller loans fell. Business loans of over $1 million grew by 5.8 percent in 2011 in terms of dollar volume. This is a big change from the 8.9 percent drop such loans saw in 2010.  By comparison, outstanding small business loans as of June 2011 were valued at $606.9 billion, a decline of 6.9 percent from the same time the previous year.  The value of the smallest C&I business loans (micro loans less than $100,000) declined by 12.7 percent.” [SBT]

This information would appear to support the idea that a smaller number of businesses were borrowing larger amounts of money, and  as of last August (2012) the value of micro loans had declined.   If this trend is holding then we may have some legitimate cause for caution when looking at the most recent Thomson-Reuters PayNet Small Business Index graphic.

Small Business lending

The graphic does show what should  be interpreted as a recovery in Business Lending for small businesses from the depths of March 2009 to June 2013.   One of the issues with this index, and with reporting it as an infallible guide to the economic health of American small business, lies in the volatile nature of the lines — one month the headline would be a glowing “Small Business Lending Increases,” and the next might be a gloomy recitation of why “Small Business Lending Decreases.”  Monthly headlines should be read with a hefty dose of caution.

Another reason to tread cautiously with this data is the old maxim: Happy people borrow, Sad people save.  In other words those who feel secure with their finances are far more likely to entertain the notion of incurring debt.  To explore this avenue, there’s another index from Wells Fargo.

Let’s assume for the sake of consistency that those small business owners who have seen their finances improve over the past 12 months are those more likely to take on more debt.  The current number is 59% — that is, about 60% of small business proprietors report more secure financial status over the past year.

More specifically,  of the second quarter of 2013 small business owners who saw their finances improving constituted about 59% of the total respondents. Again, this is progress, but should be tempered with numbers from years past — or at least previous to the last recession — in the third quarter of 2007 there were 82% of the total respondents reporting they were optimistic about an improvement in their finances.  [Wells Fargo pdf]

There is a third perspective from which to evaluate the prospects for increased Business Lending, especially for small businesses.  How do business owners report their past year  revenues?

In the second quarter 2013 10% of the bank’s survey reported their revenues had increased very positively, and 27% said their revenues had increased a little.  It wouldn’t be shooting too far from the mark to suggest that if 37% of business owners see their revenues in positive territory those will be the ones more likely to take on debt.  This leaves us with another 38% who, perceiving their revenues more negatively, are more unlikely to incur indebtedness.  [Wells Fargo pdf] These numbers are also well short of the 48% of small businesses reporting increased revenues in September 2006 — as in about 10% short.

Perhaps this is the time to ask: Is the New Normal an economic situation in which businesses at the larger end of the small business spectrum are more likely to take on debt (or, avail themselves of Business Lending) and smaller companies — those which might be more likely to apply for micro-loans — are holding back waiting for better finance and revenue statements?

It does take two to make a market, and if the potential borrower doesn’t see fairly clearly how a loan will be repaid then all the promotion and cheerleading from the banking sector isn’t going to move the needle too far in terms of increasing Business Lending to very small operations.

Who’s Borrowing What?

The latest publication of the SBA Office of Advocacy’s Small Business Lending in the United States (2011-2012) [pdf] gives us some information about the nature of the loans being backed by the SBA.

The commercial real estate loans are down, but we’d expect that in the wake of the Mortgage Meltdown.  The loans which may indicate business activity such as new equipment purchases or hiring, the commercial and industrial category, are also still sluggish.  C&I loans for $100,000 or less totaled $131.2 billion in 2007, by 2012 the total was $120.2.  Loans in the $100,000 to $250,000 category totaled $57.5 billion in 2007 and $43.6 billion in 2012. Loans in the $250,000 to $1 million range totaled $138.0 in 2007, dropping to a total of $113.5 as of 2012.  Interestingly, and predictably, 75% of these loans were made by “large lenders.”  (*Information concerning the top micro and macro small business lenders in Nevada can be found in Tables 3+ and 4+ in this report.)

It’s reasonable to assume that we’re looking at several factors in play in terms of small business lending. First, there’s the bank consolidation in the aftermath of the 2007-2008 banking debacle. Secondly, we may be looking at a slight easing of lending standards for micro and macro loans.  Third, nationally speaking we’re still below the business lending volume and values of pre-Recession America.   The last line in the conclusion section of the SBA report sums up the situation succinctly: “As economic uncertainty persists, capital markets serving small businesses remain cautious about providing more capital, while small businesses are hesitant to acquire more debt.”

Economic Uncertainty?

The phrase “economic uncertainty” is tossed about almost more casually than it’s cousin “small business.”   There is a measure of truth, and a handful of obfuscation applied when the phrases are bantered about by politicians.   Those advocating for the financialists among us — such as the allies of the big banks in Congress — are wont to conflate the “uncertainty” of Wall Street speculators who decry any attempts to regulate their trading operations with the uncertainty of Main Street,  those businesses which still feel the bind created by low revenues, decreasing or stagnant demand for goods and services, and their legitimate concerns about future income.

Thus when Senator Sludgepump or Congressman Bilgewater pontificate about the Uncertainty Factor some extra care is required to differentiate between whose “uncertainty about what” that might be.

What is certain is that increasing Aggregate Demand for American goods and services is the engine which will improve those small business financial statements and income reports, and this would have a predictably positive effect on those Business Lending statistics.

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